On January 30, 2013, the FASB and IASB discussed the following issues:
- How to identify separate lease components within a contract: This relates to those lease contracts where the agreement covers multiple underlying assets/services. The boards stated that these different “components” be treated similarly to paragraphs 28 and 29 of the the 2011 exposure draft on revenue recognition, found here. It boils down to this: the assets should be separated when the assets are regularly sold separately, but should not be separated when the goods or services in the bundle are highly interrelated, or the bundle of goods or services is significantly modified or customized to fulfill the contract. As a practical matter, this does not appear to be significantly different from current accounting for leases of grouped assets, which states that leased assets should be evaluated separately unless they are “interdependent.”
- How to determine the nature of the underlying asset for classification purposes when there is more than one type of asset that is interdependent (and therefore cannot be separated): Recall that the proposed guidelines call for two different methods: The Straight-Line Expense method (for buildings and land) and the Accelerated Expense method (for everything else). What if the leased asset happens to be a UST (an Underground Storage Tank)? By definition, the UST is equipment (which would fall under the accelerated expense method), but it is inextricably tied to the land where it is built (which is covered by the straight-line expense method). In these scenarios, the Boards decided that the method used should be based on the nature of the primary asset. In the example above the primary asset is the UST, which is equipment, and therefore the accelerated expense method would be applied.
- Property lease component that contains both land and a building: When there is a lease of building and land that are interdependent, allocating lease payments between the land and the building are not required. However, the company should assess whether the lease term is for a major part of the remaining economic life of the building, because if it is, then the accelerated expense method would be used instead of the straight line expense method.
Details of the meeting can be found here.
For those of you who need a refresher, here is a quick summary of the Straight Line Expense (SLE) method and the Accelerated Expense (AE) method. Details of both methods can be found here, (AE part 1) here (AE part 2) and here (SLE). It also appears now that the boards are expecting to release the new exposure draft in Q2 2013. The wait continues…